Archive for 2009

Immigrants are Vital to Economic Recovery

By
Dan Boscov-Ellen
Published: August 24, 2009

A new study published by the CATO Institute has findings on immigrant productivity and concluded that the focus on repelling immigrants does more harm than good to the U.S. economy; the report was covered by the Wall Street Journal and by Walter Ewing, published in the Philadelphia Inquirer.  According to WSJ:

“Increased enforcement and reduced low-skilled immigration have a significant negative impact on the income of U.S. households,” write Peter Dixon and Maureen Rimmer, the study’s authors. “In contrast, legalization of low-skilled immigrant workers would yield significant income gains for American workers and households…a program that allowed more low-skilled foreigners to enter the U.S. workforce lawfully would put smugglers and document-forgers out of business,” explain the authors. “It would also allow immigrants to have higher productivity and create more openings for Americans in higher-skilled occupations.”

Using a dynamic economic model that weighs the impact of immigrants on government revenues and expenditures, the study seeks to quantify the benefits of comprehensive immigration reform versus the enforcement-only approach. It finds that legalizing the entry of more low-skilled immigrants would result in economic gains of about $180 billion annually to U.S. households. A focus on more enforcement alone would not only result in an annual net economic loss of around $80 billion, say the authors, but fewer jobs, less investment and lower levels of consumption as well. “Modest savings in public expenditures would be more than offset by losses in economic output,” says the report.

In other news, the Asian-American Community flexed more muscle this week in the fight for immigration reform, covered by various news outlets.

More Advertisers Drop Glenn Beck - More companies came out this week opting out of being associated with his xenophobic dinner theatre. Hopefully the next step is: Glenn Beck off air.  Join in to “Stop the Race Baiting.” Next – we Drop Dobbs and Limbaugh.

Other headlines this week:

Immigration Reform is NOT Health Care Reform

White House Reiterates Commitment to Fixing the Broken Immigration System – let’s keep on it!

White House Meeting on Immigration/NDN Backgrounder on Immigration Reform

Jorge Ramos: La Promesa

Only Three Fifths of a Person – More Deaths in DHS Detention

Removing Roadblocks to the Growth of Renewables

By
Michael Moynihan
Published: August 17, 2009

On Friday, the US Energy Information released new monthly statistics for renewable energy output as well as output of traditional forms of power.  The good news is that renewable energy in May, the latest month for which statistics have been compiled, is at its all time highest level, accounting for 13% of total power.  The bad news, however, is that the vast majority of this, about 9.4% comes from traditional hydropower.  The other renewables, wind, solar, biomass and geothermal accounted for just 3.6%.   Wind accounts for 1.8, biomass, 1.3%, geothermal 0.4% and solar 0.3% of the total.

All of the sources of renewables grew, but the growth rates were modest.  Wind grew year-on-year by 12.5% and solar by only 3.5%.  These growth rates might be passable for mature technologies with a huge starting base.  However, for comparatively new technologies with a tiny denominator, these growth rates are not impressive.  True, the data do not reflect the full force of the Investment Tax Credit (for solar installations) extended last fall and the American Recovery and Reinvestment Act passed this winter–because of the lag in the data.  Still they tell at best a story of an industry surviving the recession.  They do not tell a story of economic rebirth based on the promise of a low carbon future.

There are reasons to hope clean energy would be growing much faster than these rates–the goal of lowering greenhouse gas emissions–essential to addressing climate change–and the goal of creating a new wave of clean technology-driven growth.  (The goal of energy security is less dependent on renewable technologies since coal is present in the United States but is nonetheless also served by replacing oil in our nation’s energy mix.)

However, there are also reasons to expect clean energy to be growing far faster than it is: the declining cost curves of renewables relative to fossil fuels, the large subisidies the government has put in place and the huge push America is making, from the President’s speeches to the T.Boone Pickens Plan for energy independence on down.  In many states, renewable energy is even mandated through a Renewable Electricity Standard.  Looking abroad, Germany produces 7% of its power from wind, about four times what the US does and Spain’s solar power capacity grew 364% in 2008.  Now that is the type of growth needed to have a real effect!  The fact is US growth rates in renewable industry are not meeting reasonable expectations for clean energy growth, let alone desirable targets.

I have been studying the question of why clean technology is moving so slowly into the marketplace in the United States and my research suggests that adoption of clean technology and renewable energy must be about more than pricing and incentives.  It is about decisionmaking and removing obstacles to the deployment of clean energy.  These obstacles are present, once you peer into the complex world of the electricity industry,in a host of non economic barriers to implementation.

To understand why clean energy is not–even with large incentives in place–displacing dirtier forms of energy, it is important to recall the extraordinarily complex nature of the industry.  Like all large industries, the electricity industry has incumbents.  These incumbents–unlike say car manufacturers or computer companies, are protected by regulation.  During the 1990s, the industry was partially deregulated so that market forces were introduced in some parts of the industry in some regions.  However, the work of regulatory reform proceeded only part way leaving the industry in a sort of limbo  Today, some regions of the country have wholesale competition.  Others have limited retail competition.  Still others have wholly vertically integrated companies supplying their customers with soup to nuts service unchanged from a half century ago.  And there is limited trade in electricity, this in an era, when frozen dinners served in the United States are made in Thailand and fresh flowers cut in Bolivia.

Indeed the electricity industry is quite rare today in remaining geographically divided.  With some exceptions it is illegal for a utility in one region to sell to customers in another.  There is effectively no such thing as national competition. There are, of course, many precedents for these legalized restraints on trade.  Banking used to be organized this way prior to reforms in the 1980s and 1990s.  Telecommunications after the breakup of Ma Bell but before the 1996 Telecom bill and development of national communications services was similarly organized by region.  In the case of electricity, besides the legal restraints on trade there are major physical restraints in the form of lack of capacity on the grid to move power where it is needed.

The absence of universal market allocation of power, means that decisionmaking–of what types of power to buy, what types of clean technology to implement and what types of infrastructure to build–is left, frequently to a small group of decisionmakers who are also incumbents and have a rational bias towards decisions supporting their incumbent position.  A transformative technology, for example, could reduce the value of their legacy assets.  Building a new transmission line to connect wind power to the grid, may make a plant they own obsolete.  It may therefore be entirely rational for them to discourage rather than encourage the deployment of new technology.

It would be one thing if the decisionmakers were acting on their own.  However, typically they make decisions under the rate base system that provides a guaranteed rate of return on anything they can place in the rate base.  This would ordinarily incent them toward overinvestment.  However, since regulators oversee these rate cases and generally try to lower costs, the decisionmakers at utilities have a conflicting mandate to gain a high rate of return but also keep costs down.  This can lead to a bias toward investments that pay off immediately and against investments that pay off longer term.

The upshot is that getting the type of growth rates of renewables needed to unlock the economic and social potential of clean energy is likely to take more than economic incentives and mandates.  It may well require reform to remove obstacles to the deployment of new technology.

The energy bills now working their way through Congress contain some measures to address these problems.  But my research suggests more work needs to be done.

The Coming Battle Over the Census

By
Simon Rosenberg
Published: August 10, 2009

For many months now we have been making the case that inevitably the right would make a spirited case to prevent the Census, to be conducted next year, from counting undocumented immigrants, or at least using their numbers to influence reapportionment or the allocation of resources by the government (the primary purpose of the every ten year count).

Today the Wall Street Journal is running a well-articulated early salvo in this coming battle by John S. Baker and Elliot Stonecipher.  It starts off:

Next year’s census will determine the apportionment of House members and Electoral College votes for each state. To accomplish these vital constitutional purposes, the enumeration should count only citizens and persons who are legal, permanent residents. But it won’t.

Instead, the U.S. Census Bureau is set to count all persons physically present in the country—including large numbers who are here illegally. The result will unconstitutionally increase the number of representatives in some states and deprive some other states of their rightful political representation. Citizens of “loser” states should be outraged. Yet few are even aware of what’s going on.

In 1790, the first Census Act provided that the enumeration of that year would count “inhabitants” and “distinguish” various subgroups by age, sex, status as free persons, etc. Inhabitant was a term with a well-defined meaning that encompassed, as the Oxford English Dictionary expressed it, one who “is a bona fide member of a State, subject to all the requisitions of its laws, and entitled to all the privileges which they confer.”

Thus early census questionnaires generally asked a question that got at the issue of citizenship or permanent resident status, e.g., “what state or foreign country were you born in?” or whether an individual who said he was foreign-born was naturalized. Over the years, however, Congress and the Census Bureau have added inquiries that have little or nothing to do with census’s constitutional purpose.

By 1980 there were two census forms. The shorter form went to every person physically present in the country and was used to establish congressional apportionment. It had no question pertaining to an individual’s citizenship or legal status as a resident. The longer form gathered various kinds of socioeconomic information including citizenship status, but it went only to a sample of U.S. households. That pattern was repeated for the 1990 and 2000 censuses.

The 2010 census will use only the short form. The long form has been replaced by the Census Bureau’s ongoing American Community Survey. Dr. Elizabeth Grieco, chief of the Census Bureau’s Immigration Statistics Staff, told us in a recent interview that the 2010 census short form does not ask about citizenship because “Congress has not asked us to do that.”

Because the census (since at least 1980) has not distinguished citizens and permanent, legal residents from individuals here illegally, the basis for apportionment of House seats has been skewed. According to the Census Bureau’s latest American Community Survey data (2007), states with a significant net gain in population by inclusion of noncitizens include Arizona, California, Florida, Illinois, Nevada, New Jersey, New York and Texas. (There are tiny net gains for Hawaii and Massachusetts.)

This makes a real difference. Here’s why:

According to the latest American Community Survey, California has 5,622,422 noncitizens in its population of 36,264,467. Based on our round-number projection of a decade-end population in that state of 37,000,000 (including 5,750,000 noncitizens), California would have 57 members in the newly reapportioned U.S. House of Representatives.

However, with noncitizens not included for purposes of reapportionment, California would have 48 House seats (based on an estimated 308 million total population in 2010 with 283 million citizens, or 650,000 citizens per House seat). Using a similar projection, Texas would have 38 House members with noncitizens included. With only citizens counted, it would be entitled to 34 members.

You get the idea.

We’ve been arguing, aggressively, that it is important for the Obama Administration to pass Compehensive Immigration Reform by March of 2010 (the count begins in April, 2010) in order to avoid what could become a very nasty debate indeed – in the middle of a very important election – about who exactly is an American.   To me the need to conduct a clean and accurate census, so essential to effective governance of the nation, is one of the most powerful reasons why immigration reform cannot wait till 2011, as some have suggested.

For more on this see my recent essay – Why Congress Should Pass Immigration Reform This Year.

And so the debate begins.

Update: The key passage from the 14th Amendment:

Representatives shall be apportioned among the several States according to their respective numbers, counting the whole number of persons in each State.

The Future of the American Car

By
Michael Moynihan
Published: August 7, 2009

This week the Center for Automotive Research in Detroit is holding its annual conference on the future of cars.  Entitled “Today’s Turmoil: a Foundation for Success”, the four day conference allows the global industry to hear the insights of people like Akio Toyoda, the new president of Toyota who is shaking up the company started by his grandfather and discuss subjects such as manufacturing and how to make sustainable cars.  A new face this year: Ed Bloom of the US Auto Task Force in the role of the industry’s new partner, government.

With global sales down almost 50% from their peak, it has, indeed, been a brutal year for the industry, especially so for the Big Three, now really One and a Half.   From this new low base, however, the industry is certain to rebound.  The question is whether it will rebound in America or whether the center of gravity of auto manufacturing will continue to shift away.  After the decades-old decline of the Big Three’s market share, all the management studies and manufacturing initiatiaves, capped by GM and Chysler’s bankruptcy filings, some would argue the US industry is past recovery.  I disagree.

I believe US carmakers can be part of the global rebound.  I also believe they must be if the US is to benefit from the clean economic revolution.  However, recovery of the industry won’t come easy.   The US car industry needs to reinvent itself with help from policymakers and by listening to people outside the industry, especially the customer..  The good news it that auto manufacturing tends toward decentralization.  The weight of cars, variations in standards by country and a healthy measure of politics combines to encourage localized production.  There is no risk yet of a laptop-style shift of the entire industry to Asia.  The challenges are best described as severe but surmountable.  Here are six things the US auto industry needs to do to re-emerge in strong shape from the Great Recession of which government has a role in three:

First the industry needs to rediscover innovation.  In its glory days, passionate engineers invented new tires, transmissions, solutions to the problem of knock, the octane system of gasoline, ball bearings and other breakthrough technologies of the day, the equivalent of Twitter or Facebook or in the auto industry, new battery technologies, electric drive trains, carbon fiber materials, computerization, and energy economy technologies today.  One idea would be for US car companies to put venture capitalists from Silicon Valley or prominent scientists on their boards and move their R&D operations to Silicon Valley.   VC-backed Tesla, for example, is making major strides from its Palo Alto base. Palo Alto-based Better Place is similarly working with Renault and Nissan to pioneer new charging technology for an all electric car.  Cars are a technology product and it is time to remember this.  They are also a lifestyle product.  The Big Three should draw more design inspiration from places like New York and Los Angeles.  In its early days, GM had its headquarters in New York and it would behoove the industry to reconnect with centers of excellence across the country.

Second, the US car industry needs to recapture its ability to anticipate changes in consumer taste.  In My Years at General Motors, Alfred Sloan discussed how hard this always was, yet how essential: “Even though it takes years to develop a new product, it is our job to be ready with it when there is an effective demand”.  He was describing a problem that bedeviled the industry even in1957: a sudden desire by Americans for small cars—something in which the rest of the world even then excelled due to smaller streets, high priced gas and shorter distances—that caused imports to leap.  In that crisis, the Big Three responded with cars like the Corvair a year later to recapture the lower end of the market and bring imports from 10% back down to a negligible level.  The Big Three were far less successful after the oil shocks of the 1970s when imports began building market share.  They face an even sterner challenge in the wake of last year’s oil shock.  Message: be ready with small cars when they are needed.  And in the wake of climate change which is not going away: improve fuel efficiency.

Third, the US industry must try to reinvigorate its supplier base which has suffered even more than the OEMs in recent years.  A focused effort by industry to source locally and government support to high tech companies making batteries and other parts can help fuel the substrate necessary to a sound industry going forward.  Alan Mullaly at Ford is already shifting Ford toward greater outsourcing of parts.  To insure long term sustainability, it is important to rebuild the North American infrastructure.  As discussed below, this should be an element of negotiation with companies entering the US market.

Fourth, much has been made of the so-called cost disadvantage of the Big Three’s legacy costs which supposedly added $2,000 to the value of each car.  In fact, the appropriate way to deal with liabilities was always on the balance sheet as a capital item not as an operating one.  The GM and Chrysler bankruptcies put an end to much of this liability.  However, properly accounted for and written down, these legacy costs should be a footnote on the balance sheet, not a drag on operating profit..

Fifth, much has similarly been made of the supposedly high wages paid by US carmakers relative to foreign companies that have set up shop in the South.  While the gap is overstated, labor costs are lower in the South due to lower costs and the absence of unionization.  Here the US needs to act carefully but act on labor rules that have created an unfair playing field.  Due to our state system of regulation, the US has both right to work states and others where unionization is common.  Taking advantage of US federalism, foreign manufacturers even if their own countries are 100% union have set up shop in the South. A notable exception to this stratifaction is the unionized Toyota NUMMI facility in Fremont, California, where GM was a partner however, there is talk of Toyota closing that plant in the wake of GM’s pullout.

The answer to this is not heavy handed change in our federalist system.   However, as Bob Reich has argued, the US, as a whole, loses when states and even towns bid against one another for new factories.  He proposed a body or at least baseline standards to negotiate on behalf of American manufacturing sites.  It would not be unreasonable to require new factories to offer employees a chance to organize at some point after the plant is built, require some level of local sourcing of parts and at least try to negotiate for research and development investments.  Until other countries relax their standards for foreign investment, we should not give away the store.

Sixth, and here government is the critical player, the industry needs a reasonable exchange rate.  For about a quarter century, since the end of the 1982 recession, a high dollar has benefited our financial sector at the expense of manufacturing.  Something similar happened in England’s transition from manufacturing to finance capitalism in the late 19th Century when it shifted from a trade surplus to deficit (driving a quest for colonies.).  The dangers of over reliance on finance are clear.  Recently, Laura Tyson floated the idea of retooling our economy more toward investment and manufacturing in lieu of finance, in part, by lowering the value of the dollar.  Dollar policy is not something that is widely discussed or even understood yet it has an immense effect on the structure of our economy.  Perhaps like war it is too important to be left to the generals and should be the subject of an open and intellectually rigorous academic and industry discussion.

In short, cars will continue to be built in the United States.  The question is whether we will be leaders or followers, designing the breakthrough cars of the future, or building cars introduced somewhere else a few years earlier.

To this point, of the top 5 cars purchased under the Cash for Clunkers program, four bear Japanese nameplates.   (The rankings are Toyota Corolla, Ford Focus, Honda Civic, Toyota Camry and Toyota Prius.)  Of these, all but the Prius are largely made in the United States and Toyota will begin making the Prius in Mississippi next year.  While Japanese, German and Korean investment in factories in the United States is a win win, creating jobs, economic activity and tax revenues, it does not amount to leadership.

In conclusion, the US auto industry faces huge challenges.  But the bottom of a cycle creates opportunity and the decks are now clear for a rebound.  It was not long ago that the US industries—after suffering through the 1980s–mounted a partial comeback, improving quality and inventing breakthrough products of the day such as the minivan and SUV—formats soon copied by others.  US industry and policymakers should begin taking action now to lead recovery when it inevitably comes.

What To Do About China

By
Michael Moynihan
Published: July 22, 2009

Yesterday, the US and China concluded high level talks between Secretaries Geithner and Clinton and China’s State Councilor Dai Bingguo and Vice Premier Wang Qishan on the relationship that President Obama said, at the outset of meetings, will define the 21st century.  The President is right.  How the US and China manage their relationship will determine the balance of growth and contraction, war and peace and freedom and its opposite in the 21st Century.  This then was an important set of meetings raising the deeper question of what should the US do about China.

China’s rocket-like growth over the last decade has been extraordinary. However, beyond the sparkling towers, new roads and designer airports lies the fact that China’s rise has inextricably altered the economic and diplomatic balance of power of the 20th century.  According to economist Steven Roach, China’s growth alone is likely to keep global growth above zero this year.  China, America’s largest creditor, holds about $2 trillion in US dollar debt, an amount growing daily. To put that sum in perspective, the entire balance sheet of the US Federal Reserve prior to the financial crisis was less than $1 trillion.  China is quite simply rocking the global economy.

Rapidly emerging powers, by definition, alter the status quo and in prior epochs success or failure in accommodating that change has proven critical to global stability.  At the end of the 19th century, Europe mismanaged the rise in power of Germany which (with Bismarck’s dismissal by the erratic Wilhelm II) contributed to World War I.  Then in the early 20th century, the world failed to recognize Japan’s emergence as a major power after she defeated Russia in 1905 and began building airplanes capable of crossing the Pacific.  In contrast, through the post war framework of the Bretton Woods institutions including the GATT, the Bank for International Settlements (designed to lessen exchange rate imbalances), the IMF and the World Bank and the UN as well as the European Union and other organizations, the world did a much better job of accommodating the rise of Japan, the NICs and the peripheral European states at the end of the 20th Century.

Now, with China’s emergence, however, the world faces a new rebalancing of political and economic power.  And the task, as President Obama suggested, is to manage it in a way that benefits the US, China and the world.

Economic theory–in contrast to the popular notion of competing nations–teaches that one country’s rise should benefit others.  A richer China should consume more US goods.  It should produce more and through spillovers and the creation of knowledge, contribute to the global commons.

One country, moreover, cannot succeed as China has without others.  China remains dependent on the US as the major market for its exports.  In some ways the US China relationship is deeply symbiotic.  We design goods.  China makes them cheaply.  We buy them, allowing US consumers to get more for less.  However, to the extent that the Chinese consistently sell more to us than we buy–as a result of the Yuan being kept artificially low, America gets more stuff but loses industry, China gets less stuff but gains industry and China ends up holding US dollar denominated debt.  That is the story of our recent relationship in a nutshell.  Chinese economic officials, waking up their huge exposure to the value of the US dollar, have scolded the US about its deficits which could weaken the dollar and have floated the idea of diversifying into other currencies.  The threat to unseat the dollar as the world’s reserve currency is a serious shot across our bow.  Besides these economic issues, other matters on the table in Washington this week included nuclear proliferation and climate change.

In many ways, China in its economic strategy has followed the same trajectory of Japan and the other Asian tigers.  She has pursued a policy of export-oriented growth leveraging her low cost base built on the four pillars of a cheap currency, high savings financed through suppressed consumption, an aggressive state role in the economy, and a policy of securing technology transfer for market access.  The strategy is neo-mercantilist which is to say, its practical effect is to generate a trade surplus and accumulate hard currency.  (The original mercantilism practiced in Europe prized trade surpluses to accumulate gold and silver.)

However, China’s story is qualitatively different than that of Japan and the NICs in certain respects.  First, on the political track, beginning as a Communist country, China has, so far, not followed South Korea and the other NICs toward authoritarian democracy.  China remains a totalitarian police state. And second, she is simply larger in scale and scale changes everything.  Long before China reaches western standards of living, her overall GDP will be the largest in the world.  And, unlike the other Asian NICs, she is so large and her labor supply so abundant that her cost of labor can stay low even as her exchange rate appreciates.

On the political side, China does not appear aggressive in foreign policy.  Like the 19th Century resource-hungry European powers, she has been courting natural resources in Africa to fuel production.  However, she has pursued a commercial as opposed to political strategy.  While she is a nuclear power, she appears more preoccupied with economic growth currently than military objectives.

In many ways, the relationship with the US has proven beneficial for both.  An example of positive symbiosis would be the manufacture of the Apple iPhone.  Designed in the US, it is made in China by a company called Foxconn.  Both the US and China benefit from the success of the iPhone.  As an example of the political and human pitfalls of the relationship, however, one can point to the case of a Foxconn employee recently hounded to the point of defenestration by police and company security after he lost an iPhone prototype. Afterward, Apple issued a statement saying it was awaiting results of an investigation into the employee’s death.

The US China meeting this week made no news on the issue of climate change or nuclear proliferation, a complex initiative that will take time.  The principle outcome was that the US pledged to work to lower US budget deficits to protect the value of the dollar and China pledged to increase domestic demand.

With respect to the US concession, the very fact that the US had to apologize for our deficits shows how the balance of power in the relationship has changed.  As for the Chinese concession, it is indeed the right policy for the US and China to pursue.  As a result of the massive stimulus package enacted in China of close to $600 billion, some 88% of China’s GDP growth this year will occur in investment, much of it in infrastructure.  Most of the rest of the growth will come from exports.  Virtually none will come from consumption and increased living standards for the Chinese people.  This must change.  By allowing its people to consume more and buy more of the world’s products, China can help its own people live better and the rest of world produce more.

For its part, the US has to stop living beyond its means which means borrowing less both to fund government and imports.  That will put the US back on track toward more sustainable growth.

Economically, what remains unresolved is the depressed Yuan which continues to drive the Chinese trade surplus and the US deficit.  Clearly the Yuan has to appreciate to the point where US goods are competitive with Chinese ones.  The US should exert its negotiating leverage sooner rather than later on this point because the more US debt China accumulates, the worse the negotiating position of the US will become.

The one issue not explicitly on the table–apart from sympathy expressed by the US toward Chinese minorities–but that ultimately must underscore our relationship with China is how Chinese success will impact the US commitment to freedom and democracy.

The strategy not only of the US but of the West in general has been to encourage economic growth in China while hoping this will lead to greater freedoms.  This policy of engagement as opposed to containment is  the right strategy for now because it would be absurd for the US to disengage when China is moving in the right direction. However, China has moved far more slowly than many hoped and the US posture toward China has, all too often lacked even a semblance of muscularity.

The US has been a poor or non existent negotiator on behalf of US companies in standing up for values we hold dear such as freedom of expression.  The government has left companies such as Google and Yahoo to cut individual deals with the Chinese to gain market access.  Our government has also been missing in action when it comes to allowing companies to negotiate away technology in exchange for access to the Chinese market.  The US could be doing far more to strengthen the negotiating position of US-based companies which ultimately would benefit not only us but the Chinese people by widening their access to goods and information.

President Obama is right that the US China relationship will be critical to shaping the 21st century.  And ultimately, this is about accomodating China’s rise without sacrificing America’s values or our standard of living.  This week’s meeting was a useful first step.  Still problematic, however, are the huge trade imbalances resulting from an exchange rate imbalance and China’s negotiating position toward US firms that is far tougher than ours in the opposite direction  As we go forward, we should accelerate action to move the two countries toward a truly sustainable, long term partnership.

Trade and Carbon

By
Michael Moynihan
Published: July 22, 2009

This past weekend, Secretary of State Hillary Clinton traveling in India received the message, courteous but firm, that India has no intention of capping carbon.  The rationale provided is that India has low per capita emissions.  This is, to be sure, India’s best argument.  Her overall emissions are soaring as her population spirals upward–India only two thirds as populous as China a decade ago, will pass China to become the world’s most populous country of almost 1.5 billion people in 2030.  India’s per capita emissions are rising too from industrialization.  But they remain below those in developed countries.  China, the other key holdout on capping emissions can make a similar per capita argument though it recently passed the US to become the world’s largest emitter and its emissions are soaring as it develops.

While the posture of India and China are problematic on their own, they make it harder for other countries to take action.  After all, if the world’s two most populous and dynamic economies growing at about 7% (down admittedly from China’s 13% growth in 2007), won’t opt in, why should the US which contracted last quarter at a 5.5% rate.  With America’s standard of living under siege putting America at a further competitive disadvantage–no matter how much carbon we emit per capita–is a tough sell to voters.  And what emerges is a classic collective action stalemate.

This dilemna highlights one of the diferences between greenhouse gases and other environmental issues. Unlike cleaning the air or water where the benefits are realized locally, keeping costs and benefits within one country, reducing emissions benefits the entire planet but costs whomever does it growth.  This is what makes a global solution–such as that promoted by the UN through the Kyoto and now Copenhagen process so attractive.  However, if China and India won’t come to the table, what should the US do?

One solution attracting interest of late is the use of trade policy to punish carbon havens. Indeed, at the last minute, the House inserted into the Waxman Markey bill a provision to impose tariffs on countries that do not take action to limit emissions.  In announcing his support for the House bill after its passage, President Obama flagged the provision as troubling insofar as it runs counter to free trade principles.

So is trade policy a valid tool in climate policy?  The New York Times recently argued it is if enacted multilaterally but not if unilaterally.  Paul Krugman, my professor of trade policy at Princeton, has endorsed the idea in theory.  My view is that trade policy is a problematic tool from a practical standpoint that would require significant new infrastructure to work at all.

The problem with using trade policy for an environmental purposes are fourfold.

First, trade actions have an unfortunate tendency to invite retaliation and provoke trade wars even in a multilateral context.  No matter how good your case, other countries can respond in kind.  The result is then a lengthy negotiation or WTO process that ultimately harms both parties.

Second while the temptation to use trade policy to protect clean domestic industries against dirty foreign ones may be great, the track record for mixing the environment with trade is poor.  More often than not, environmental regulations have functioned as non tariff trade barriers.  Domestic companies claim them when threatened economically and verifying them becomes a political football.

Third, as with food safety regulations, labor regulations and other hard to measure quantities, measurement is labor intensive and becomes an impediment to good regulation.  This would complicate administering any tariff.  It might overwhelm the WTO.

Fourth, increasing the price of an import to protect a domestic industry can have the adverse consequence of increasing the price of inputs for other domestic products.  A classic example is that when the US slapped a tariff on LCDs to protect LCD domestic manufacturers in the 1980s, it drove American laptop manufacturing offshore.  Taxing imports from carbon havens to protect domestic industries could raise manufacturing costs for other companies causing the latter to shift their production to carbon havens.

Those are the arguments against. On the other hand, giving imports a total pass not only harms domestic producers but is tantamount to a cordial invitation to domestic companies to shift production–and jobs–offshore.  This issue came up, of course, in the NAFTA debate.  Ideally, there ought to be some middle ground.

To view how a tariff might succeed or not, consider the case of electricity intensive aluminum production.  Rio Tinto as one example, produces aluminum using a hydro power in Canada but coal-based power in Australia.  Were the US to slap a tariff on aluminum produced with coal-based power (hard enough to determine in and of itself), aluminum produced with hydro power would be cheaper. One outcome would be for Rio Tinto to phase out coal in favor of hydro in the production of aluminum.  Were that to occur, one might call a US tariff an environmental and economic success.

Another possible outcome, however, would be for Rio Tinto to fulfill US demand with an unchanged mix of product that would cost buyers more due to the tariff.  In that case, US companies might decide to shift the production of products using aluminum overseas.  This would be an environmental and economic failure.  The deciding factors between the two outcomes would probably be Rio Tinto’s ease of substituting zero carbon energy source for coal and the domesic companies’ difficulty of moving production of products using aluminum oversas.

In short, it is hard to predict in advance just how the tariff would impact the market, but it is clear, the more carbon havens exist, the greater the likelihood that production will seek them out.

Currently a workable regime is not readily at hand.  Were a trade regime to ultimately be invoked, here are some thoughts to guide its development.

First, as with the capping of carbon emissions themselves, putting a price on emissions in imports should be pushed as far up the value chain as possible. This is because as products grow more complex, tracking their carbon footprint becomes more difficult and trade restrictions multiply.  Any trade-based taxes on carbon intensive goods should be directed upstream at basic goods such as steel or aluminum, not at finished products made from those commodities.  While this could drive downstream industries overseas, on balance, I think, it would be far less distortionary to address a few commodities than many products.

Second, some sort of standardized process for measuring carbon footprints needs to be devised.  However, it would be preferable for some private body to administer standards rather than a governmental organization.  A number of creative startups are trying to devise novel ways of tracking carbon.  One such ventures is Greenerone.com which uses crowd sourced information–or information gleaned for free by numerous reporters to track the environmental profile of products.  Others are working on more industry-focused products.  Whatever system is used should involve as little bureaucracy as possible consistent with being stable and standardized.

Another idea, admittedly bold, would be to devise some sort of average duty–product independent–to penalize countries that choose not to limit their emissions during production.  Such an approach would have to be administered multilaterally, lest it lead to an immediate trade war, thus it is not something the US could do in and of itself.

The very complexity of using a trade hammer shows that it is far preferable to develop a coordinated multilateral regime than to use trade policy.  Free trade has created wealth since the days of the Minoans and since then for the Athenians, Carthaginians, Romans, Indians, Venetians, Portuguese, Spanish, British and yes, Americans to name only a few.  It is, in contrast, a clumsy tool for achieving environmental goals.  Nonetheless, if India and China–and for that matter the US,  refuse to address the problem of a changing climate, the pressure to use trade policy to achieve those goals will only increase.

Clean Technology and Competitiveness 2.0

By
Michael Moynihan
Published: July 14, 2009

Clean technology clearly holds great promise for future economic growth.  However, as development of new clean technologies accelerate in the United States, it remains an open question whether US firms and workers will capture the economic activity or whether the bulk of the benefits will flow elsewhere.  The issue cropped up in the recent passage of the cash for clunkers law which will reward consumers for trading in clunkers for newer fuel efficient cars.  The law will benefit American consumers and carmakers but also benefit carmakers and overseas suppliers selling into the US market.  And, indeed, it shadows the entire issue of clean technology driven growth. While the transformation to a clean economy will pay important environmental and security dividends no matter what, how the economic promise of clean technology ultimately gets divided will vary by country.

Call it Competitiveness 2.0.  It is the subject of a penetrating article in the current Harvard Business Review by two Harvard professors, Gary Pisano and Willy Shih entitled “Restoring American Competitiveness: Why America Can’t Make a Kindle“. The professors examine a wide range of technologies from computer equipment to software to clean technology and find America at a growing competitive disadvantage. Both the data they cite and the case studies they include should serve as a wakeup call to anyone thinking about clean technology and the future of the US economy.

While innovative ideas continue to flourish in the United States — think Twitter, Ning and Facebook–the US has become a technology laggard among the OECD countries in critical measures. The US trade deficit is old news but the authors point out since 2002, the US has been running a deficit even in high tech goods and services. The main export of the US is capital.  And there are precious few bright spots in the technology firmament.

In the case of the Amazon’s Kindle reader, which the authors examine in detail, though engineers in California designed the product, there is simply no US capacity to make the components.  (If the US lacks the capacity to make a Kindle could it make a military computer in a pinch?)  In aircraft, Boeing continues to lead the world but it now relies on a network of global suppliers and has cut its American workforce.  Managing this complex supply chain led the company to delay delivery of its Dreamliner.  All but the highest end computers are now made abroad. And even complex software tasks, from writing software to using it for engineering, are moving overseas.

In clean technology, leadership in battery technology lies abroad. GM’s Volt, scheduled for introduction next year, for example, will source batteries from South Korea. While a few companies such as Tesla are developing advanced auto technologies, the US lags Asian and European companies in hybrid and other technology.  With most growth in the world’s auto sales likely to take place in China, India and the developing world, companies like Tata and Chery (originally a Chinese knockoff of Chevy) will have a homefield advantage. Chinese, Japanese and Korean companies dominate all PV production of solar cells except in thin films — the most advanced and promising technology where US firms still lead the way. In smart grid technologies, US companies face roadblocks in the form of an excessively complex and highly regulated utility industry.  Installing new smart grid meters and retrofitting old buildings only gets you so far in terms of new jobs and new businesses.  All told, while the US has the potential, thanks to our still- unmatched system for financing innnovation, to develop the technologies of tomorrow we are, all too often, behind in the technologies of today.

What are the sources of our competitiveness problem? America continues to lag in primary and secondary education. Our universities may be the best in the world, but most of the spots in top PhD programs now go to more motivated students from overseas.  (Community colleges are a US strength that can be scaled as Rob Shapiro has argued and the President recognized today in calling for their expansion.)  The relentless search for low wages continues to send capital out of the US. American firms still can receive tax breaks for moving jobs overseas. Short term thinking, driven by the next quarterly results dominates corporate strategy.

On the macroeconomic level, the US continues to stress consumption over production. This bias, which derives from a strong dollar that keeps imports cheap as long as others lend us the money to buy them, encourages overseas instead of domestic production. A weaker dollar and shift toward a producer and investment-led economy would temporarily lower standards of living, but may be what is required to create the foundation for long term growth. Recently, former NEC head, Laura Tyson, proposed just such a shift in national priorities. While these are complex questions, a real debate over our priorities — toward consumption–or production is in order.

In the 1990s, the US made major strides in reversing its competititiveness deficit so that by decade’s end it was leading the global economy. However, as Pisano and Shih make clear, those strides were temporary and the problem has returned.  The competitiveness issue, the authors show, is far more problematic today than  at any time in American history.  And if this issue is not satisfactorily addressed, the US will not see wages, standards of living or other metrics of welfare rise. As NDN has long argued and as the HBR authors note as well, stagnant wages combined with rising expectations led to the absurd borrowing that precipitated the latest financial crisis.

In short, if the US is to reap the economic rewards of a clean technology revolution, we need to seriously examine our competitiveness posture and take the steps needed to put us back on track to leading, not lagging the global economy.

New Policy Institute Helps Promote Breakthrough Report on mHealth

By
Dan Boscov-Ellen
Published: June 26, 2009

A major part of the new media and tech revolution that is sweeping the globe today is the emergence of the ubiquitous mobile tools we used to call “cell phones,” tools which not only have the ability to change politics, but also governing, education, health outcomes, and much more.

The New Policy Institute recently joined the U.N. Foundation and the Vodafone Foundation to co-host a reception for the Washington, D.C., release of their report, “mHealth for Development: the Opportunity of Mobile Technology for Healthcare in the Developing World.” This breakthrough report examines mHealth in the developing world and provides more than 50 case studies demonstrating that mobile phones can provide increased access to healthcare and health-related information in remote places, improve ability to diagnose and track diseases, and provide timelier and more actionable public health information.

From the report’s introduction:

Mounting interest in the field of mHealth—the provision of health-related services via mobile communications— can be traced to the evolution of several interrelated trends. In many parts of the world, epidemics and a shortage of healthcare workers continue to present grave challenges for governments and health providers. Yet in these same places, the explosive growth of mobile communications over the past decade offers a new hope for the promotion of quality healthcare. Among those who had previously been left behind by the ‘digital divide,’ billions now have access to reliable technology.

There is a growing body of evidence that demonstrates the potential of mobile communications to radically improve healthcare services—even in some of the most remote and resource-poor environments. This report examines issues at the heart of the rapidly evolving intersection of mobile phones and healthcare. It helps the reader to understand mHealth’s scope and implementation across developing regions, the health needs to which mHealth can be applied, and the mHealth applications that promise the greatest impact on heath care initiatives. It also examines building blocks required to make mHealth more widely available through sustainable implementations. Finally, it calls for concerted action to help realize mHealth’s full potential.

To read all of this pioneering report, click here. Also, be sure to check out Alec Ross, Senior Advisor on Innovation to the U.S. State Department, talking about mHealth at the reception:

Clean Technology Innovation: Reaping the Rewards

By
Michael Moynihan
Published: June 9, 2009

New York City — Business Week has a provocative article this week by Michael Mandel on innovation — or the collapse of it — in America. According to Mandel, many of our current woes stem from a failure to innovate over the last decade since the glory years of the late 1990s. While most Americans still take pride in our innovation, Mandel provides some sobering statistics: the wages of young college graduates — precisely the group that should be succeeding in the information economy — declined 24% between 1998 and 2007. The U.S. trade balance in high tech goods flipped from a $30 billion surplus in 1998 to a $53 billion deficit in 2007. Mortality statistics actually worsened for those 45 to 54, belying talk of medical breakthroughs.

All of this leads to my topic for today: making good on the promise of clean technology. Now one of the hottest areas in Silicon Valley and an area that the Obama Administration believes is key to powering prosperity, clean technology has — as John Doerr has said — more potential for wealth creation than information technology. Yet despite numerous technology breakthroughs, the clean energy and technology space has yet to generate the type of home runs on a company level or growth on an economy-wide level needed to reinvigorate the American economy and get wages moving upwards again.

In my view, there is no question that innovation is the key to America’s economic future. The wealthiest country in the world cannot compete with low-wages countries on labor costs. To sustain high wages, our people must create new industries in which competition is based on new capabilities and, in effect, scientific magic, not on who can make widgets for less. We have the best scientific infrastructure and system for financing innovation on earth. Nonetheless, as Mandel points out, our system has not delivered on an economy-wide level for the last decade.

It is tempting to blame this on the policies of the Bush Administration. And the Obama Administration has begun to reverse a reliance on financial engineering, as opposed to real engineering, to get us back in the business of creating new products. However, to really get innovation back into high gear, I believe more steps are needed.

Within clean technology, a very promising area of innovation is the smart grid. However, virtually none of the money for smart grid included in the ARRA bill will go to young entrepreneurs — burrito-eating Stanford grads, as Doerr once described them. Because of a 50% cost-sharing requirement and large average size for grants, most will go to large regulated utilities. Moreover, the entire clean energy industry is hampered by a key difference between the energy industry and, say the Internet industry: the presence of incumbent players with an interest not in innovation but rather in preserving incumbency.

Many young clean technology companies find themselves in the role of selling to a small group of customers, most heavily regulated and unusually conservative. In a given geographic region, they may therefore have only one customer, creating a so-called monopsomy. Monopsomies, the flip side of monopolies, provide exceptional buying power to a single gatekeeper who can, if desired, not buy a product at all. A real life example of a monopsomist is a coffee buyer in a remote region who may have virtually unlimited power over small growers. Oil companies, similarly, enjoy government tax credits, market power and other incumbent advantages that can work against companies offering alternative technologies. So long as these sorts of gate-keepers and roadblocks to innovation exists, clean energy will fail to realize its promise.

What is the way around roadblocks to innovation in the energy sector? The answer, broadly speaking, is to get the end user or consumer involved.

The consumer is a great arbiter of product quality. Unlike a middleman, incumbent or gatekeeper, the consumer’s highest priority is features for money expended. In software, computers, electronics and sectors where the consumer is empowered, the consumer has driven innovation.

Two policy ideas stand out as ways to get the consumer involved in energy decision making. First, the smart grid itself, if developed in an open way, will drive innovation buy allowing software developers, producers of services and others to build products around an open standard. On the other hand, the smart grid, if developed in a closed or proprietary way, will merely perpetuate the market power of insiders. The key is to set a standard that allows plug and play capability so that entrepreneurs can develop products for customers around it. Just as coffee consumers, once informed about fair trade, have begun to buy fair trade coffee, consumers, if given the choice, will buy products and services around the grid based on their preferences.

Second, it is time to revisit the issue of electricity reform to offer greater choice to consumers. Electricity reform began in the 1990s but came to a halt. Since then, we have learned what structures make markets work best and competition should be extended to the consumer level.

Finally, the government should be more flexible in how it supports research and development for clean technologies, to make more money available to smaller, more nimble firms as opposed to entrenched incumbents. While it may be possible for governments playing catch up to to bet on strategic industries, as Japan did after World War II, when it comes to innovation, picking winners should be avoided. No single analyst or committee, no matter how smart, can substitute for trial, error and the verdict of the marketplace.  However, government can encourage open standards and a level playing field to encourage numerous solutions to problems.  And by making money generally available not only to large players but to small ones, it can help rekindle innovation.

These three steps will help accelerate innovation in the clean technology space. And innovation is what is needed to raise wages, create jobs and get America’s economic engine hitting on all cylinders once again.

The Immigration Proxy Wars Continue

By
Simon Rosenberg
Published: February 13, 2009

There are many good reasons to fix our broken immigration system this year. But there is one reason that may end up driving Congress to act this year more than any other: the growing weariness of lawmakers as the year moves on of battling over immigrants and immigration on issue after issue, something I call the immigration proxy wars.

Our broken immigration system is a national disgrace, yet another terrible vexing governing challenge left over from the disastrous Bush era. Legitimate workers have a hard time getting legal visas. Employers knowingly hire and exploit undocumented workers. Our immigrant justice system is a moral outrage. And of course, the scapegoating of the undocumented migrant has become the staple for right-wing politicians and media, giving them something to rail against as the rest of their agenda has collapsed all around them. It is long past time to fix this broken system and replace it with a 21st century immigration system consistent with traditional American values and the needs of our modern ideas-based economy.

This year we have seen how this national failure has infected debates about other vital national priorities. SCHIP was held up. The stimulus was loaded up with a provision to use our broken and dangerous worker verification system that would undoubtedly disrupt the orderly flow of money to the states. And now Judd Gregg withdraws in part over the coming battle over the Census next year, which we know will include an effort by the right to exclude undocumented workers from the every 10-year head count of those living in the United States. Any future legislative initiative at the federal or state level that confers benefits to a population could conceivably invoke a battle over immigrants: will states require schools receiving school construction money from the stimulus to validate that only legal kids are covered with it? Will families who want to weatherize their homes have to prove their legal status? Will kids getting a laptop in a demonstration project have to prove their legitimacy? And of course, moving on universal health care coverage will require the immigration system to be fixed first. Passing comprehensive immigration reform may very well be the key that unlocks progress on a wide variety of other domestic challenges.

State judicial and law enforcement systems across America are already overwhelmed by the murky problems of our broken and irrational system. Schools and health care providers are desperate to not become an arm of the immigration police. Mexico’s drug problems are growing in severity, and will raise the importance of a comprehensive solution to removing any illegal activity from the border region. Next year, the Census is likely to become one long and huge fight about undocumenteds and immigrants if the system is not fixed this year, perhaps even causing years of future battles over the legitimacy of the count if it includes the undocumenteds (which it clearly should). And the proxy wars in Congress and in the states will continue. There is simply no way to duck this one, wish it away. Inaction is not an option any longer. By the fall, the pressure on lawmakers and the President to address a very visible national problem, and the fatigue of battling this out in proxy war after proxy war, will create a climate in which progress on this tough issue I think will be more than possible.

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